April 19, 2014

Financial Crisis 2011: The Ten Worst States

In an effort to educate and empower the people, we occasionaly repost articles in the “Timeless” section of the website. These articles hold informative and valuable information regardless of the date. We hope you enjoy the information and better still use it to gain understanding and insight.

Video explaining the fiscal conservative values.

Piper to States: Time to Pay

In recent days, massive protests by government workers in Wisconsin and Ohio have brought the nation’s debt problem sharply into focus. Here are the top ten States in the worst financial condition.  The list will surprise you.  And prepare for a shock – South Carolina is on it.

Many States face bankruptcy (Note 1), weighted-down by the generous pension and benefit costs of government workers.  This, on top of other reckless spending, has made a bad situation worse.  All States (except Vermont) have constitutional requirements for balanced budgets, so extraordinary measures to cut costs and raise revenues are being undertaken across the nation.

It is no coincidence that Wisconsin and Ohio have emerged as the first States to face their unionized worker problems head-on.  Of all fifty States, Wisconsin and Ohio are in financially the worst shape in this regard.  This is surprising because California and New York are most often held up as the worst examples of fiscal bloat and excessive debt.

Government workers rioting in Greece, 2010

Protests by government workers in Wisconsin and Ohio are reminiscent of the widespread protests that engulfed Europe for much of last year.  Fiscally unsustainable wage and benefit policies compelled several European countries to enact tough cutbacks for unionized workers.   It was inevitable this problem would come to America.

Which States are in the poorest financial condition?  It depends on how you look at the problem.  There are basically three ways to answer this question:

States with the largest fiscal deficits.

States with the most excessive debts.

States with the largest unfunded worker pension and benefit liabilities.

Financial Crisis 2011:  The Ten Worst States

The following table ranks the worst of the worst in each of these three categories.  The actual data appears later in this article.

Rank

Worst Deficits

Worst Debts

Worst Unfunded Benefit Liabilities

1

Arizona

Massachusetts

Ohio

2

California

Connecticut

Wisconsin

3

Nevada

New Jersey

Alaska

4

Illinois

New York

Illinois

5

New Jersey

Illinois

Alabama

6

New York

California

New Jersey

7

Rhode Island

Wisconsin

South Carolina

8

Kansas

Maryland

Colorado

9

Oregon

Louisiana

Connecticut

10

Alaska

Florida

Minnesota

Other

SC = 33

SC = 12

California = 11

South Carolina ranks 33rd among all States, in terms of its fiscal deficit.  This is the only category in which South Carolina does well.  South Carolina ranks 12th in terms of excessive debts and seventh-worst in unfunded benefit liabilities for government workers.  Wisconsin, here we come.

Here is the actual financial data (Note 2):

Deficit % Reserves Debt % GDP Unfunded Benefit Liabilities % GDP
AZ  65% MA  9.0% OH  57.6%
CA  53% CT  8.8% WI  47.1%
NV 47% NJ  8.1% AK  43.6%
IL  44% NY  5.9% IL  43.1%
NJ  40% IL  4.7% AL  41.5%
NY  39% CA  4.3% NJ  37.7%
RI  35% WI  4.1% SC  37.3%
KS  34% MD  3.8% CO  36.6%
OR  32% LA  3.5% CT  34.5%
AK  29% FL  3.4% MN  34.5%
SC  22% SC  3.2% CA  31.0%

 

States with the Worst Deficits

Arizona has by far the biggest fiscal deficit problem compared to other States.  Ordinarily, a common way to measure this is to compare the size of a State’s deficit to the size of its overall economy.  This measure, however, is obsolete.  The days of fiscally irresponsible States borrowing to cover their spending deficits are over (Note 3).  Many States are tapped-out with excessive debts.     Therefore, the measure used here instead of debt is to compare a State’s deficit to the size of its cash reserves.  This produces the ranking shown above.

South Carolina ranks 33rd among States, in relatively favorable condition.  This is somewhat deceptive because South Carolina’s 2010 deficit nevertheless consumed 22% of its cash reserves – a hefty amount.  Still, most States are in far worse condition.  Arizona, by contrast, saw its 2010 deficit consume 65% of its entire cash reserve.  California clocked-in at 53%.

During 2010, the average State suffered budget deficits that consumed 29% of cash reserves.  This means that many States – those with high debt loads and dwindling cash reserves – must finally face the music in 2011.  They have exhausted their financial resources.

Deep budget cuts and large tax increases loom.  Fiscally speaking, 2011-2012 will probably be the worst time for States since the Great Depression. 

 

Government love affair.

States with the Worst Indebtedness

Excessive indebtedness is measured by comparing the size of a State’s debts to the size of its economy.  This is a principal indicator of a State’s ability to repay its debts.  It also indicates the extent to which the cost of debt – interest expense – consumes State financial resources.

Massachusetts and Connecticut are by far in the worst condition here.  Their debt loads are, respectively, a whopping 9.0% and 8.8% of State GDP.  South Carolina ranks near the Top Ten with total indebtedness of 3.2% of GDP.

 

 

States with the Worst Unfunded Worker Benefit Liabilities

This is the 800-pound gorilla in the room.  Unfunded pension and healthcare liabilities of State government workers are enormous.  At about $3 trillion, they dwarf the size of State budget deficts, which totaled $191 billion for all fifty States during 2010.  Unfunded benefit liabilities even exceed all State debts, which total about $2.5 trillion (Note 4).    

Taxpayer message to government workers.

What are unfunded liabilities?  Every year, States must set aside money to pay future pension and healthcare benefits to government workers and retirees.  This money is invested in stocks, bonds, real estate and other assets.  These assets increase in value over time and produce investment income.  This, combined with the State’s annual cash contribution, is supposed to grow into a nest egg large enough to pay future benefit claims of government workers.  Instead, State benefit accounts are chronically underfunded.  This means they have far less money set aside than necessary to pay future benefit obligations.

States will eventually have to cover these deficits.  The longer they wait, the harder it will be.  Some States are already so deep in arrears, like Wisconsin and Ohio, that urgent and drastic action is needed now.  Otherwise, there is little hope they can ever catch-up and properly fund their benefit accounts.

South Carolina is among the worst States.  We are in far worse condition than California and New York – even though those two States get all the bad publicity.  The unfunded pension and benefit plans of government workers in South Carolina equals 37% of GDP.  This means properly funding these benefit accounts will cost South Carolina a huge amount – more than one-third of an entire year’s economic output.

This is an enormous burden.  Where is the money going to come from?  The problem is so big, it cannot be fixed without cutting worker benefits.  It could be worse.  We could be Ohio or Wisconsin.

____________________________________________________________________________________

1       The term “bankruptcy” is used as a figure of speech here.  States are not legally permitted to declare bankruptcy under the Federal Bankruptcy Code.  The Code was amended by Congress during the Great Depression to permit municipalities to declare bankruptcy.

2       Data for State 2010 deficits and deficits as a % of General Fund reserves are from the Center on Budget and Policy Priorities, “States Continue to Feel Recession’s Impact,” by Elizabeth NcNichol and Phil Oliff, February 10, 2011.  Data for State 2010 deficits as a % of total State economic output or GDP is based on State 2009 GDP as reported by the Department of Commerce, Bureau of Economic Analysis, February 2011.  Data for State debts and unfunded government worker pension and healthcare benefit liabilities are from Forbes, “The Global Debt Crisis:  Is Your State a Debt Disaster?” by Jon Bruner, January 10, 2010.

3        On January 26, 2011 Moody’s Investors Service made an earth-shattering announcement.  Moody’s is the world’s largest bond risk rating agency.  They will now include unfunded pension and benefit liabilities in each State’s overall investment risk rating.  This change, long resisted by States and local governments, will make it more costly and more difficult for them to borrow money.  Unfortunately, Moody’s side-stepped an important reform issue – how States calculate their future benefit needs.  Many States use accounting gimmicks to disguise their employee pension and benefit funding problems.   Corporations must follow strict rules that make it difficult to “cheat” in meeting their pension obligations.  Governments have no such rules.  New York Times, “Moody’s to Factor Pension Gaps in States’ Ratings” by Mary Walsh, January 27, 2011.

4        In reality, the unfunded pension and benefit liabilities for goverment workers is most likely far higher than $3 trillion.  This is because States are not subject to strict accounting and actuarial rules about how to compute the future value of their worker benefit obligations.  States tend to disguise the true size of these problems.  They do this in many ways, like making unrealistic assumptions about future investment returns, economic growth rates, retirement rates, benefit costs, and so forth.  “Officially” the States report about $3 trillion in unfunded liabilities.  True estimates range as high as $11 trillion – almost as much as the Federal debt of $14.2 trillion.   Of course, the Federal debt does not include its unfunded liabilities either – things like Social Security, Medicare, Medicaid, the FDIC, FannieMae and FreddieMac, the Pension Benefit Guaranty Corporation, the Federal Reserve Bank, the Commodity Credit Corporation, the Federal Farm Bank, the Export-Import Bank, and innumerable other Federal agencies and quasi-government units.  Estimates for these liabilities are all over the map.  $100 trillion seems to be a good place to start.  It is inconceiveable that this amount can ever be paid.

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Comments

  1. keepyourpower says:

    That must have taken a lot of hard work.

    Thank you!

  2. toccata888 says:

    Thank you.

  3. MissLiberty says:

    I knew SC had problems, but I didn’t realize how high we ranked in unfunded pension liabilities. None of these problems came about overnight, but it appears as though the answers always seem to include a lot of finger pointing rather than real solutions. It becomes more clear by the day that a great deal of house cleaning needs to take place – not just elected officials, but staff. As a business person, I’ve always believed that what happened on my watch was my responsibility. A shame that “management” in our government doesn’t all feel that way.

  4. Carl says:

    Well done, thanks a bunch. This is why I love the CTP website!

    Charleston isn’t generally considered a big union state and that leave a large part of our population not understand that we do have unions and unions liabilities that have been promised.

    According to http://www.unions.org/unions/ there are 40 unions in SC. Their website lists all 50 states so it’s an interesting read if you have a few minutes.

    » AFGE – American Federation Of Government Employees

    » AFM – American Federation of Musicians

    » APWU – American Postal Workers Union

    » ATU – Amalgamated Transit Union

    » BBF – International Brotherhood of Boilermakers

    » BCTD – Building & Construction Trades Department

    » BLE – Brotherhood of Locomotive Engineers

    » BMWE – Brotherhood of Maintenance of Way Employees

    » BSOIW – International Association of Bridge, Structural, Ornamental, and Reinforcing Iro

    » CJA – The United Brotherhood of Carpenters and Joiners of America

    » CWA – Communication Workers of America

    » CWU – Communications Workers Union

    » GMP – Glass, Molders, Pottery, Plastics, & Allied Workers International Union

    » IAFF – International Association of Fire Fighters

    » IAM – International Associations of Machinists and Aerospace Workers

    » IATSE – International Alliance of Theatrical Stage Employees

    » IBEW – International Brotherhood of Electrical Workers

    » IBT – International Brotherhood of Teamsters

    » ILA – International Longshoremen’s Assocations

    » IUOE – International Union of Operating Engineers

    » NALC – National Association of Letter Carriers

    » NAPFE – National Alliance of Postal and Federal Employees

    » NATCA – National Air Traffic Controllers Association

    » NPMHU – National Postal Mail Handlers Union

    » NTEU – National Treasury Employees Union

    » PAT – Professional Association of Teachers

    » PPF – Plumbers and Pipe Fitters Union

    » RLCA – National Rural Letters Carrier’s Association

    » SMW – Sheet Metal Workers International Association

    » UAW – United Auto Workers

    » UFCW – United Food and Commercial Workers

    » UGSOA – United Government Security Officers of America

    » USW – United Steel Workers

    » UTU – United Transportation Union

  5. MissLiberty says:

    Thanks for posting that union info, Carl. That link is a great resource and I’ve now saved it to my favorites. Union members are understandably upset when their “rights” are threatened, but the math shows that they have been vastly over promised. Union officials should hang their heads in shame, but they won’t.

  6. Gwen Clark says:

    Great, informative article! Thanks so much for posting!

  7. MissLiberty says:

    Spread this one around – there is so much good info.

  8. William Cheong says:

    All decent, honest and right thinking people who faithfully believe in their own religious teaching and who do not betray their own conscience would agree to the virtue and universal principle of promoting and enhancing peaceful co-existence for all mankind and of helping the unfortunate to reduce their sufferings. This itself is no easy task. It requires concerted efforts and coordination among all important countries concerned. Having differences and disputes over issues can never disappear even in the smallest unit of a family leave alone among countries. Therefore this is a common phenomena in the human world. However with understanding and with common sincere desire to resolve differences and disputes through dialogues and discussion, problems can eventually be resolved and resolved in the amicable way. Honestly if we are sincere to ourselves, we have to admit there is no better effective way than this. God will help those who believe in justice, honesty and sincerity.

  9. Iris Nie says:

    Most American are sincere and honest. God will help those who belive in Him and follow Him. Ordinary American should have more wisdom. Why workers reply on Union officials and government? Why not rely on God and follow Him??????Why workers give some portion of your salary to government, then government give your portion of salary to investor? The government promis too much and investors and brokers promise too much. The problem is government, bankers, investors, and people in Wallstreet cannot keep their promise like God. That is why there is debet and economy crisis.

  10. Concerned says:

    Returning federal tax rates to any of the rate systems in place between 1945 and 1985 would accomplish 3 things:
    1) Fully fund the the currently unfunded liabilities listed by the author
    2) LOWER taxes on lower-income people, while raising them on the wealthiest
    3) Dramatically reduce Federal and state deficits

    The simple truth that the corporate overlords don’t want you to know is that employment rates were highest, wages highest, poverty rates lowest and budget deficits thinnest when tax rates on the wealthiest were highest and when the bracket system had more gradations. Though this is an obvious conclusion, it also plays out empirically. Drastically rewriting the slave labor trade agreements and getting rid of the wars of imperial expansion, while retaining only a DEFENSIVE military, would also do a hell of a lot to reduce the deficit as well as the justified international outrage at the United States’ usurpations of other nations’ sovereignty. Kick out the Corporatist branch of the DNC (Obama and Kerry included) and kick out the NeoCons dominating the GOP (Boehmer, McCain, Ryan and the vast majority of that party).

    Retain only genuine Progressives on the Left (e.g. Dennis Kucinich, Bernie Sanders, Bryan Dorgan) and genuine Conservative Libertarians on the Right (e.g. Ron Paul). These are the honest branches of both sides of the political spectrum Though the resulting ideological divide would be significant, it would be a genuine refreshment to the superficial, immaterial divides that separate the ever-closer DNC and GOP platforms. The result would be less corporate welfare, more public good, a restoration of civil liberties, a drastic reduction in sovereign debt and a growth of small business as special handouts, rebates, giveaways & subsidies to giant, job-killing, wage-cutting corporations are trimmed back by these branches of both parties.

    A 20th century history lesson is in order for the severely uninformed political reform movements of the 21st century.

  11. Frank (trackman55) says:

    Governments are paying workers to sit in offices and classrooms without perfoming the jobs that they are paid to do. They hire an employee and give him 15 hours sick and annual a month to start…after 10 years annual leave increases…so for all the benefits that are giving workers there is a need to hire other workers to cover the ones that are out using their sick and annual leave. It is a big whirlpool of unnecessary spending. It is very difficult to fire and employee once he or she learns how to milk the system and stay within the boundaries of what is allowed. States need less employees…and more WORKERS!!

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